Stephen Feman
As we are all aware, President Barack Obama signed the Patient Protection and Affordable Care Act on March 23 (P.L.111-148). It is far-reaching, and will influence many parts of our lives for many years. The concern of this report, however, is what it will do to you today. When examined from the perspective of a single individual, its biggest immediate effect will be the requirement that every U.S. citizen and legal resident have qualifying health care insurance coverage. The new law indicates that those without coverage will have to pay a penalty. This penalty will start to take effect in 2014, and be phased in over a two-year interval. By 2016, the penalty will be the greater of $695 per year per person, up to a maximum of three times that amount ($2,085) per year per family, or 2.5 percent of a family’s household income. That is, those with an income of $27,800 per year or more will be fined an amount equal to 2.5 percent of what they report as income to the Internal Revenue Service. In addition, starting in 2016 this penalty will be increased annually by a cost-of-living adjustment.

Interestingly, exemptions will be granted for some very specific cases. The most common ones are financial hardship, religious objections, and those without coverage for less than three months. The exact level of financial hardship is spelled out in the law quite succinctly; the only people who qualify are those with incomes below the tax filing threshold (in 2009, the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples).

The other side of the situation is that if you have employer-sponsored health care insurance, or pay for your own insurance, you can keep your current policy. However, the new law requires a higher minimal standard of benefits for all participants. As a result, it is expected that by 2016 all policies will cost 10 to 13 percent more than the expected future cost of a current policy extended to that year. Countering that expense will be a potential tax credit by which a family of four that has an income of less than $88,000 will receive tax credits to help pay insurance premiums and deductibles. At the same time, people at the other end of the economic spectrum will be given a new burden. Those families that report an income of more than $250,000 per year will have to pay more in the form of a Medicare payroll tax; their unearned income will be subject to an additional 3.8-percent tax.

As you know, in the past some of my colleagues advised individuals and small businesses to purchase health savings accounts (HSAs). The new law will have an immediate effect on people that took that advice. It will exclude a currently accepted practice, in which the costs of over-the-counter drugs not prescribed by a doctor were reimbursed on a tax-free basis. The law will increase the penalties for inappropriate distributions from HSAs, also; that is, for withdrawals that are not used for qualified medical expenses. But, to the best of my knowledge, none of my friends were using their HSAs for unqualified expenses.

So, what does this mean to the people of Missouri today? At this specific point in time, very little seems to be happening that has a direct immediate impact on most readers of this blog. The fines and penalties that might become associated with an independent attitude won’t kick in for another few years. But a lot more will happen in other aspects of the health care arena by that time. They say that the true art and science of economics involves an understanding of the changes that occur at the margin, and we need to look at all the little bitty changes, one at a time, to see how they fit. So far, and from this single perspective, these marginal changes are quite minimal. But this is just the beginning. Going through the health care bill section by section during the next few weeks will give us a better idea of what it is really all about.

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Stephen Feman